What Infrastructure Do Manufacturers Need To Implement Servitization?

This post was originally featured on the Field Service USA blog.

This is the third post in a three-part series exploring servitization. The first post dove into the underlying problem that begat the need for servitization, and the second post dove into what servitization is and the impacts to manufacturers (OEMs) and their customers. This post will explore the infrastructure OEMs need to build in their organizations in order to bring servitization to life.

We’ll start with the implications of servitization on financial infrastructure, then dive into org structure, and lastly technology tools.

At the most basic level, servitization is about growing long term, recurring revenue while reducing short term business risk. More specifically, this is about moving from just selling capital equipment to selling equipment and services on top of that to maximize the value that customers can extract from a given piece of equipment. In the most extreme servitization models, this may even involve subsidizing capital equipment sales with service revenue, incurring a short term cash hit for even more long term recurring revenue.

The move to servitization has substantial impacts on cash flows. Traditional OEM cash flows tend to revolve around end-of-quarter as capital equipment purchases can take significant time to approve and typically revolve around quarterly budget meetings. Note that the numbers below are for a hypothetical OEM.

This stands in stark contrast to a more typical servitization based cash flow model, where revenue between equipment sales and service blurs and normalizes.

Although there is still seasonality in the servitization model, the month-over-month cash flow changes are tempered significantly. This reduces cash flow risk to the OEM, normalizes customer payments for the customer, and presents an opportunity for greater long term revenue capture per customer. Everyone wins.

Although every organization is different, it’s possible to paint broad strokes on the management structure needed to deliver servitized performance. The key to delivering servitized product delivery is organizational alignment. The lines between sales and service must blur: sales teams must learn, appreciate, and sell the value of service and customer-value-extraction. Service, on the other hand, must recognize that the company’s financial performance will depend on their ability to execute and ensure that customers extract the expected value from the OEM’s equipment.

If service fails, revenue will be negatively impacted. As a result of this interdependence, sales and service organizations need to work more closely together. These two organizations should report into a single unified head - with a title such as VP of Customer Success - whose two largest components of variable comp should be service delivery and sales, in that order. It must be clear from the top down that customer service is king.

Lastly, OEMs will need a new set of tools to succeed in a servitization world. Traditional field service management software will not be enough. Servitization is about customer service; as such, OEMs will need new tools to more effectively engage and support their customers. On demand support tools such as those offered by Pristine will become ever more important. So will tools that empower customers to diagnose and repair equipment on their own. These tools will become mission critical as OEMs won’t be paid if their equipment isn’t working as advertised. OEMs must find and implement the right tools so that their customers can service equipment on demand with OEM support and guidance.

Field Service Organizations Are Burdened With Incompatible Business Models

This post was originally featured on The Field Service Blog.

Field service organizations encompass two distinct business models that are intrinsically incompatible, yet the norm. How is this possible, and how can service organizations reconcile these models?

I’ll start by explaining the business models that service organizations are burdened with. They have two types of customers: those on contract, and those off contract. Sales divisions are asked to sell service contracts because they’re intrinsically high-margin, and in some cases, 100% margin if the customer never calls for support. And yet, once the equipment sale has been made, if the customer is on contract, the service organization is incentivized not to come out and actually service the customer. Why? Because the trip is purely a cost and is eating into what was 100% gross margins. I’m not suggesting that service organizations act unethically and violate service contracts by not sending staff out; rather, I’m saying that on a marginal basis, with a service contract in place, service organizations would rather not come on site to service a customer than come on site because on-site trips incur significant costs that cannot be recouped on a marginal basis.

On the other hand, service organizations are happy to service customers who are off contract. Why? Because the service organization can gladly mark up the cost of the ad-hoc visit to cover the marginal costs of the trip. For off-contract customers, service organizations profit from every service trip. The irony of this is that although service organizations profit from servicing off-contract customers, service organizations are always trying to upsell service contracts!

Thus is the paradox of service organizations: they’re incentivized not to service their best customers – those who have agreed to pay for a service contract – and are incentivized to service their worst customers – those who won’t pay for a service contract.

How did these incompatible models come to coexist?

In short, the current divergent business models are based on legacy assumptions. Decades ago, field service was different than modern service:

1) equipment wasn’t as complicated, and was thus more capable of being fixed by local technicians rather than experts employed by the manufacturer

2) there were fewer electronics. Electronic components are increasingly difficult to fix by non technical experts, requiring professionals with entirely new skill sets

3) customers were less demanding in terms of guaranteeing reduced downtime and response time

Over the last few decades, these assumptions have broken. Equipment is more complicated than ever, and businesses are increasingly less willing to deal with downtime. Despite these changes, the field service model hasn’t materially changed. Service organizations still try to up-sell service contracts, and still do everything they can to avoid on site trips since on-site trips are so expensive on a marginal basis.

The output of the structural changes is that field service has for many organizations devolved into a cost center, or at best a marginal profit center. But given the antithetical models that service organizations have to house, service has lost strategic relevance.

In the next post of this two part series, I’ll explore how some of the leading equipment manufacturers and their service organizations are re-inventing their service models to align with customers more effectively, and as a result, drive strategic value of service organizations.

The Technology Hype Lifecycle: Google Glass Edition

This post originally featured on Forbes.

Recent announcements from Google about the future of Glass naturally ignited an explosion of commentary in the tech media. For those of us in the Glass at Work world, the news that Glass has “graduated” from Google[x] into a true business unit headed by Tony Fadell is very promising. Yet many outlets’ coverage focused on the end of the Glass Explorer program for consumers, characterizing it as the final death knell for the technology.

So why the disconnect?

Historically, Glass has fallen victim to the technology hype lifecycle, and has done so more strongly than most technologies.

The Technology Hype Lifecycle

There’s a famous graph you’ve probably seen before on the Internet that charts the lifecycle of hype for new technologies.

But in a number of ways, this graph isn’t quite right – specifically, the plateau of productivity isn’t illustrated correctly. Technologies plateau far above the peak of inflated expectations.

Consider Mobile Computing

In the late 1990s and early 2000s, Microsoft recognized the potential of mobile devices, so they built Windows Mobile and worked with OEMs to deliver Windows Mobile phones. They were way too early and made some fundamentally poor design decisions. They dreamed big, but failed to deliver on most of them. By 2004, BlackBerry was emerging with phones that could support basic business communications, contacts and calendar functions. Mobile computing was exiting the trough of disillusionment. Google saw this and bought Android in 2005. Rumors suggest Apple started development of the iPhone in late 2004/early 2005. They saw it too.

What no one foresaw was not only how fast the curve would ramp up, but the magnitude of the peak. Even in 2009, no one could have imagined Uber or Tinder or Snapchat, let alone 2007. Even today, we still do not know where the curve will plateau. How could Microsoft, or anyone else for that matter, have seen the potential of mobile computing in 1999 when they committed to building the (failed) future of mobile computing?

The mobile computing hype cycle graph actually looks something more like this.

Who knows which of today’s Series A and Series B stage startups are the next Uber? Kevin Spain from Emergence Capital has recently been evangelizing that today’s enterprise mobility market resembles that of the cloud in 2004. If that’s the case (and given mobile’s incredible penetration today), there is only one inevitable conclusion: mobile is eating everything.

So What About Glass?

Right now, in early 2015, Glass seems to be deep in the trough of disillusionment. The media has been hammering Glass lately, declaring its demise and failure, and before today’s announcement, Google itself was very quiet about Glass’s future. For the record, Glass is not just alive and well, but thriving in professional and enterprise use cases.

But what’s much more important isn’t Glass’s near-miss with death, but its tremendous potential. Glass is today where mobile computing was in 2000: dreams seemingly shattered by early setbacks.

The Glass curve will look a lot more like the mobile curve than the famous generic curve. We are seeing tremendous growth as enterprises adopt Glass to solve painful economic problems that were previously unsolvable.

The Glass growth curve will not mirror the mobile growth curve identically. Glass will peak at a lower point on the hype cycle graph than smartphones did. Smart glasses simply don’t have the upside potential on a per-person basis that smartphones do. Glass competes with smartphones; smartphones compete with laptops. The marginal improvement from always-on-you smartphones to hands-free Glass is material, but not as large as the jump from sitting-only laptops to always-on-you smartphones. Moreover, the best use cases for Glass are for desk-less, hands-on workers; these workers typically earn substantially less than their white collar, desk-bound counterparts. Smartphones amplify the productivity of expensive workers; glasses multiply the productivity of less expensive workers.

Having said that, Glass is still nascent today. We are at the tip of the iceberg. There is tremendous potential to be had in hardware, software and services. Over the next few years, we will see tremendous innovation from startups and giants. Hardware experiences are going to diverge. Software developers will experiment and pioneer new user-interaction models. Cloud services will evolve and take on an increasing percentage of computing. We know nothing, which means we can still do anything.

The Virtuous Cycle of Sacrifice in Startups

I ask people to sacrifice dozens of times a day. I ask candidates and my team to sacrifice employment at bigger companies that pay more and expect less. I ask our investors to put the capital they went to such great lengths to raise behind us. I ask prospects to believe that our insanity can solve pressing business problems. I ask partners to expend their precious resources on us.

I ask literally everyone around me to give up something substantial. I am always asking. Thus I am always taking.

Except that I'm not.

I ask our stakeholders to give...to our stakeholders. Everyone is sacrificing for everyone:

Our employees sacrifice for our investors, customers, and partners. They bust their asses day in and day out. Our engineers are working into the evenings regularly to deliver for our customers. Our marketing team is rapidly accelerating our public profile and our lead generation machine so that our engineers' code can make a dent in the world. Our sales team is creating value for customers. Our client success team is moving mountains to fulfill our promises. Everyone at Pristine is doing everything they can for our customers, investors and partners.

Our investors have gone out on a limb for our employees, and in turn, our customers and partners. And we put them to work: we work with them nearly daily to find and close candidates, customers, and partners. They know how hard it is to create a new market, and they are betting their time and precious capital on our ability to succeed. They are all in for everyone else.

Our customers are placing bets on us. They're betting that we aren't full of it. They're betting that we aren't a security liability. They're betting that we won't disrupt their mission critical business operations. They're betting that we don't piss away their capital into the massive abyss of failed startups. Executive sponsors within our customer organizations are risking their political capital with us to build our mutual vision. Our customers are sacrificing for our employees, investors, and in turn partners.

Our partners are betting on us too. They shouldn't waste their time on losers. We have to prove to them that we deliver value: relationships, revenue, growth, marketing, and more. They're offering their time and effort for our customers, investors, and employees. They expect that we reciprocate.

Many people love the energy and vibe of a startup. Although it's easy to attribute the startup mentality of boundless optimism to naivety about the challenges ahead, there is a deeper source of connection. We all know that we are sacrificing for one another. It fosters a deeper bond between all of us. We aren't here because we just need to feed ourselves; we're here because we believe in a shared mission.

We are all sacrificing for one another. That is the virtuous cycle of sacrifice in startups.

The Pristine Story: Springing Ahead

Since the last episode of the Pristine Story, we've been busy as springtime bees!

Since announcing our launch at Brown University, we've gone live at three additional hospitals, with several more coming in May. We're holding back on PR for a bit, but will have some big announcements in the coming weeks, so keep an eye out for those.

We're not just busy at home, though...

HIMSS INNOVATION SUMMIT

Dr. Paul Porter (from Brown University) and Kyle will be presenting at the National Healthcare Innovation Summit in Boston.

They'll discuss Brown's experience using Glass for telemedicine in the ER, and present data on how Pristine's solutions dramatically improve efficiency in the care delivery system.

ATA ANNUAL MEETING 2014

If you're headed to the American Telemedicine Association Annual Meeting in Baltimore, come visit us at Booth #1814. We'll be the ones in clever T-shirts and Google Glass.

In fact, we're giving away a Google Glass unit to one lucky ATA attendee, so make sure to stop by our booth and enter our raffle!

Engineering Update
 
Our engineers led the most recent meeting of the Austin Google Developer Group (GDG) diving into the innards of WebRTC on Android.

Keep an eye on The Looking Glass (our engineering blog) over the next few days for more on how Pristine uses WebRTC, our slides from the GDG meeting, and more.
 
Finally, while it may be busy in the land of Pristine, we still find time to commit our thoughts to prose. To wit, our recent blog post (penned by Kyle) that examines the difficulty in reducing the cost of care.

And if you need more material to for your week's reading. There's plenty more analysis, commentary, and forward-looking thought on our blog. Enjoy!

That's it for this installment of the Pristine Story, stay tuned for more!

Until next time,